A bear market is coming, sooner or later

The calendar is just hitting the home stretch for the year, but it’s time to recognize that virtually everyone who made calculated forecasts for 2014 was wrong.

They weren’t making “bold predictions” when they expected interest rates to be on the rise this year, putting bonds on the decline, or when they called for the market to take some kind of breather — perhaps as big as a 10% or 15% pullback — before continuing its upward trend. They were expecting muted returns where the year might end with a gain of, at best, 8% to 10% on the Standard & Poor’s 500
SPX, -0.07%
; defensive sectors like utilities and real estate investment trusts would see a comeuppance.

And yet, rates have stayed flat, bonds have gone up, the market has avoided the “correction” that was supposed to adjust its long-term growth path, and the S&P is already up more than even the most ardent optimists were calling for by year’s end. If you didn’t bail out on an average REIT or utilities index, you’ve seen comfortable double-digit gains year-to-date.

Bolder forecasts — like those calling for a market crash — at best are looking “premature,” according to the people who made or believed in them in the first place. (You can suggest that a prediction was “early” — if indeed the events happen at some point in the future — but that doesn’t actually make it right.)

I point out the errant forecasts because a month from now we will start entering the silly season when pundits looking to grab some ink start predicting 2015. The “year-ahead outlook season” is now like holiday-shopping campaigns and sales promotions, starting earlier every year, and hard to ignore.

So here’s what you can expect to hear from most mainstream experts.

If there’s no decline of 10% or more from now until a forecast is made, the big bugaboo will be a looming downturn. While experts will couch their calls in a lot of ways, the underlying logic will be that it has been about three years since there has been a downward move of that size and the average since World War II has been that the market has had a step-back of that magnitude once every 12 months.

Once experts suggest that the pullback will happen, they then have to suggest what to do next.

If they are calling for a correction — rather than something larger, deeper and more nefarious — they will also be suggesting that a backsliding market represents a buying opportunity. That means you can expect the standard advice to involve waiting for a market pullback before throwing more money at the market.

So while every prediction for what was supposed to happen this year has now been balanced with some explanation of why things turned out differently — all of those excuses being every bit as plausible as the forecasts themselves — the lesson for investors is that trying to predict reliably and consistently what the market will do is folly.

While there will be the occasional expert who manages to put together a long streak of good calls, that crackerjack is the outlier, the anomaly whose “vision” — statistically speaking — would take decades to be proven truly as being more skill than luck. In other words, by the time you recognize the guy with the validated expertise in forecasting, he’d be nearing retirement or you will be nearing death.

In short, about the only fair thing you can say about the future is that it’s just like the present — with all of the uncertainty and theories about what could happen next — only much longer.

You could argue that the folly in forecasting is such that all predictions are worthless. But the experts making these calls are doing their job, and their chores aren’t going to stop no matter what happens next on the market. An investor’s job is not about forecasting at all; instead, it’s to use the forecasts to frame expectations, and then to build a portfolio that reflects all opinions that they respect.

Thus, if they believe a prognosticator calling for a deep, prolonged decline, they take steps to prepare for that call to be right; likewise, if they also like what they hear from someone who is bullish on the future, they dedicate a piece of their portfolio to that prediction as well.

Taking in so many predictions and look-aheads makes investors consider different points of view, a worthwhile effort precisely because it is so easy for experts to sound “smart,” but so difficult for them to actually be “right.” Betting on one or two forecasts — or a few guesses based on similar market vantage points — is where average investors typically go wrong.

What we can say about most prognostications is that the next ones will wind up being just as wrong as the last ones, with discrepancies explained away until, ultimately, there’s a new, adjusted view on the future that acts as if the first call never existed.

Bear markets and corrections have not been rescinded. They’re coming again, sooner or later.

Likewise, bull markets aren’t limited because of how long solid runs have gone on in the past; it would be foolish to think that “this time it’s different” and that a bull run can continue uninterrupted, but it would be an equal folly to miss out on a lengthy upswing just because you missed the bottom and are waiting now for a “perfect time” to jump in.

So when you hear the first forecasts coming for 2015, think back eight or nine months to year-end 2013 and the consensus that formed then, and remember how far from reality that turned out to be.

If the market has proven nothing else in 2014, it’s that nothing in economic theory or stock-market history or recent memory should lead you to believe that anyone can predict the future accurately.

Company

Dow Jones Network

Intraday Data provided by FACTSET and subject to terms of use.
Historical and current end-of-day data provided by FACTSET.
All quotes are in local exchange time.
Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.